The Securities Law (Amendment) Ordinance 2013: An Analysis

In Depth

The Securities Law (Amendment) Ordinance 2013: An Analysis

Dr. Kanwal DP Singh | September 2013

President Pranab Mukherjee promulgated the Securities Law Amendment Ordinance 2013 on July 18, granting the Securities and Exchange Board of India (SEBI) the powers to regulate any pooling of funds under an investment contract involving a corpus of Rs 100 crore or more and attach assets in case of noncompliance. This comes in the wake of recent exposure of thousands of fake ponzi schemes running across the country.

The ordinance was put into effect in accordance with the powers granted to the President under Clause 1 of Article 123 of the Constitution. An Ordinance promulgated under this Article has the same force and effect as an Act of Parliament. It is generally laid before both the Houses of Parliament and ceases to operate at the expiration of six weeks from the reassembly of Parliament, or, if before the expiration of that period resolutions disapproving it are passed by both Houses. It may be withdrawn at any time by the President.

The recent Ordinance empowers the SEBI chairman to carry out search and seizure operations as part of efforts to crackdown on illegal ponzi schemes. With the President’s approval of the Ordinance, the SEBI has received the power to seek information, such as telephone call data records, from any persons or entities in respect to any securities transaction being investigated by it. Establishment of special courts enabled by this Ordinance would fast-track the resolution of the pending SEBI related cases.

MAIN FEATURES OF ORDINANCE IN BRIEF

The government has allowed SEBI to seek information from other regulators within India and abroad with retrospective effect, paving way for collection of details pertaining to cases pending for over 15 years. In another retrospective change, the individuals and companies being probed by SEBI can settle their pending investigations.

Such settlements can be undertaken in cases that are currently pending for more than six years. To tackle the growing menace of ponzi schemes being floated as Collective Investment Schemes (CIS), the rules have also been amended to classify any money collection of Rs 100 crore or more as CIS operation. SEBI has been given powers to crack down on illegal investment schemes floated by individuals as well as against companies only till the time being. However, all government-notified schemes would be out of the CIS framework. Among others, SEBI has also been given powers to pass disgorgement orders for amount equivalent to wrongful gains or to losses averted by contravention of regulations.

The amendments have been made to following three Acts:

Securities and Exchange Board of India, 1992 (SEBI)
Securities Contracts (Regulation) Act, 1956 (SCRA)
Depositories Act, 1996 (Act, 1996)

IMPORTANT AMENDMENTSARE AS FOLLOWS

Power to call for information: Section 11(2) (ia) of SEBI Act has been inserted to empower SEBI to call for any information or records from any person including bank or any other authority or board or corporation, which shall be required in respect of any investigation or inquiry by SEBI. SEBI can call for information in matters relating to violations in respect of ecurities laws, from authorities whether within India or outside. This can be done with retrospective effect from March 6, 1998.

Meaning of CIS broadened: Section 11AA of the SEBI Act laid down qualifying criteria to be a CIS for schemes or arrangements, which pooled funds from the public. Nowa deeming provision, i.e. a legal clause, has been added. According to this amendment, any pooling of funds under any scheme of arrangement involving a corpus of Rs100 crore or more and not registered with SEBI shall also be taken to be a CIS. This will bring chit funds having corpus of more than Rs100 crore under the purview of SEBI which according to Section 11AA were exempt. Presently, the situation for such schemes is as follows:-

Schemes with corpus of more than Rs20 crore have to be registered as an Alternate Investment Fund.
Such schemes could qualify as a CIS only if they were offered by any company. With Ordinance2013, even schemes or arrangement offered by persons can qualify as a CIS. This means that any company or even an LLP which offers such schemes can qualify as a CIS and be regulated by SEBI.

Powers of SEBI to issue directions: Section 11B of SEBI Act, Section 12A of SCRA and Section 19 of Act, 1996, pertain to powers of SEBI to issue directions. By Ordinance 2013, an explanation to all these sections has been inserted to mean that powers so vested with SEBI is to include and shall be deemed to have included power to direct any person to pay back the amount equivalent to the profit made or loss averted to any wrongful gain or loss averted by any contravention.

Search and seizure powers to SEBI: SEBI has been given power to search any building, vessel, and aircraft or break open the lock of any door or a safe. Additionally, SEBI can also seize any books or accounts, place marks of identification and record on oath the statement of any person. Such powers have been granted after amending Section 11(c) (8) of SEBI Act.

Powers to make regulations: Section 11(c) (9) now to empowers SEBI to make regulations to lay down the procedure to be followed by any authorized officer. These relate to:

For obtaining ingress into any building, place, vessel, aircraft to be searched where free ingress is not available.
For ensuring safe custody of any books of accounts or documents seized.

Further, section 11(c)(10) of SEBI Act has also been amended to allow the investigating authority to return the documents or records seized without intimation to Magistrate of such return.

Changes in administrative and civil proceedings: Section 15JB of SEBI Act, Section 23JA of SCRA and 19-IA of Act, 1996 ,have been newly inserted. They allow persons against whom any proceeding has been initiated for defaults to file an application to SEBI to propose settlements. These sections have been inserted with retrospective effect from April 20, 2007.

OMISSION OF SECTIONS RELATED TO APPEAL TO SAT AND COGNIZANCE OF OFFENCE BY COURT

Section 15T(2) of SEBI Act has been omitted. This section prohibited any appeal from being made to SAT of any consent order.Section 26(2) of SEBI Act and SCRA and Section 22(2) of Act, 1996 has also been omitted by the Ordinance, 2013. These sections prohibited any court inferior to that of a Court of Session to try offence punishable under these acts.

Establishment of Special Courts: Section 26A in SEBI Act and SCRA and Section 19- IA of Act, 1996, have been inserted to allow constitution of special courts for speedy trial of offences. A special court shall consist of a single judge who shall be appointed by the central government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. Further, any offence shall be tried by a Court of Session until the special court is established. It has been provided that the provisions of Code of Civil Procedure, 1973, shall be applicable to the proceedings before a special court.

ANALYSIS

The need to give more teeth to the SEBI was in the calling for long. Advancement of technology creates new challenges everyday and the SEBI required additional powers to bring perpetrators to book. Sweeping powers have been granted in form of searching and seizure of documents, which were only enjoyed by limited authorities till now.

By grant of retrospective effect to these powers, SEBI has been empowered to deal early on with cases pending for more than 15 years. It remains to be seen how effectively SEBI utilizes these additional rights in the interest of the investors and economy at large. What sets the Ordinance apart is that violators can be brought to book at the earliest in the wake of the special courts that promise speedy trails. Among others, SEBI has also been given powers to pass disgorgement orders for amount equivalent to wrongful gains or to losses averted by contravention of regulations.

Many penalties imposed by SEBI are often contested in courts of law and the cases drag on for years. After taking into account the “nature, gravity and impact of defaults”, SEBI has been empowered to accept or reject such a settlement on payment of an amount to be decided by the regulator, subject to some terms and conditions. However, no appeals are allowed. The changes are part of as many as 22 amendments made by the government in three main Acts.

The chit-fund scams and related illegal activities have forced the government to sit up and take notice and grant powers to the market regulator. In terms of collective investment schemes, the proposal is to widen and enlarge the definition. Several companies or people running such schemes have claimed that they do not fall under the ambit of the SEBI. Therefore, the explicit provision will clear up any ambiguity which exists as far as it goes. Any investment corpus of Rs 100 crore or more will be classified as a collective investment scheme, whether it is being run by a person or by a company.

SEBI had moved the Supreme Court recently to seize properties of Sahara and summon its chief Subrata Roy. In this light, it has sought direct powers to seize, summon and conduct searches, without approaching the district metropolitan magistrate. It remains to be seen if the SEBI can put to use these powers after they have been authorized by the cabinet.

It is interesting to note that most regulation of SEBI has been reactive in nature. The bulk of these regulations occurred, for example, in reaction to the Harshad Mehta and Ketan Parekh scams. Post-Satyam scam, SEBI came out with these amendments through regulations.

The need for additional powers also comes in the wake of revelation that most ponzi schemes are proliferating at the district level. These are at very small levels and SEBI, with its manpower of 600 people, had a challenging job at hand to enforce it. Therefore, the active steps from the government were required. Sahara is more of a sui generis case. Following the Supreme Court ordered the SEBI was able to attach its properties. So, this specific additional power that SEBI is permitted to attach properties directly if violator does not pay up is a significant addition.

The regulator with new powers is keen on going after entities that are indulging in Ponzi schemes. The ordinance will change the way SEBI cracks upon schemes that are not in the best interests of investors. Earlier, SEBI could only ban the company from raising funds, but could not recover those funds. Now it can. This comes as a huge relief to investors as even old cases will see some movement in courts. It is evident that the rationale behind the proposal is to mandate all IPOs to provide a safety net mechanism to essentially control issuers and intermediaries on its fair pricing and reinforce investor confidence.